Journal entry for pre paid expenses

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Sometimes ago, I have written about how to prepare balance sheet in tally. If you read my old post, then you will know about some basics of accountancy which as accountant you must know. Accounting of journal entry of prepaid expenses is  a must for preparation and finalization of accounting statements as well as to find out the actual profit/loss during the time by the entity

Proper accounting of prepaid expenses is such a basic accounting feature which an accountant must know and understand the same. So you must know what expenses should be  determined as prepaid expenses for journal entry purpose.

In a computerize accounting software like tally, preparing a balance sheet is not as easy as ABC or just pressing certain keys of the key board. However it will be a half-cooked  balance sheet as an accountant should be needed  to pass several journal entry before he generate a perfect balance sheet.

in my earlier post on how to prepare a balance sheet, I have covered several journal entry that should be posted   in the books of account. Today I will explain one more such journal entry that  needs to pass for finalization of books of account. This journal entry is about prepaid expenses.

What is pre-paid expenses?

As the name suggest, it is an expenses which is paid in advance and mostly these expenses are relating to Insurance expenses. A prepaid expenses is calculated and decided on the base of the period covered by that expenses and period covered by the books of account.

Let me explain you with example

A company paid insurance premium on plant and machinery for Rs. 1,00,000 as date 1st June 2009. Now check the period of the policy document. The period is stipulated by the insurance policy is starting from 1st June 2009 to 31st May, 2010.

Now as per the Income tax Rules, books of accounts are required to be prepared as per financial year e.g. from 1st April to 31st March.

So, in the above example Insurance premium pertaining to the period 1st June to 31st March, 2010 only will be accounted in the books of account for the FY 2009010 (In other words it will be debited to profit and loss account) and the balance insurance expenses for the month of April 2010 and May 2010 should be debited to the profit and loss account of the FY 2010-11

So, in the FY 2009-10 two months insurance premium will be shown as advance payment of expenses (Pre paid Expenses under the group loans and advances or current assets) and on the first day of the next year (FY 2010-11 in this case) prepaid insurance expenses entry which was made on 31st March, 2009 is required to be reversed.

to calculate prepaid insurance in the above example, divide entire expenses of Rs.1,00,000 by 12 months it will come out 8333. now multiply it with 2 months period that is relating to next Financial year and will be accounted  as pre paid expenses

Now, Let’s see how to pass this entries in the books of account,

HOW TO PASS JOURNAL ENTRY FOR PREPAID EXPENSES

When the insurance premium of Rs. 1,00,000 paid as on 1st June, 2009 the entry will be made as per below :

Dr. Insurance premium Rs. 100,000.00

Cr. Bank account Rs.100000.00

(Being amount paid towards Insurance premium for the period…… vide policy number…..)

On 31st March 2009, prepaid expense journal entry will be passed as per below for the above expenses

Dr. Prepaid Expenses   Rs. 16,667.00

Cr. Insurance premium Rs. 16,667.00

(Being two months insurance premium transfer to prepaid expenses account)

On 1st April,2010, the above entry will be reversed in the books of account by Dr. Insurance premium and crediting Prepaid Expenses with the same amount i.e. Rs. 16,667.00

EXPENSES WHICH REQUIRES TO BE PASS AS PREPAID

As explained above, any expenses paid in advance as on date of closure of books of account is to be treated as pre paid expenses. Generally following types of transactions are to be looked for prepaid expenses and for this purpose the period covered by the expenses is very important to determine whether an expenses consist a portion of the pre paid expenses

If you need further explanation, then don’t hesitate to drop your comment here.

  • ALI

    Hi Sir

    Can u jst give me examples for advance rent , office rent

    Thanks Regards
    Ali

    • Shamshad Qazi

      1. Advance Rent:

      (a) Prepaid Advance …..Dr. 72,000
      To Cash/Bank 72,000
      (Being Rent paid in advance for 6 months @ 12,000=12,000*6=72,000)July to Dec 2011.

      (b)Rent …..Dr. 12,000
      To Prepaid Rent 12,000
      (Being the rent paid for July,2011)

      So,the entry in (b) is passed every end of the month till Dec,2011. July,Aug,Sep,Oct,Nov and Dec,2011.

      • shadat

        Thanks for the answer i hereby request you please give the answer below question.

        1.How to pass the entry of depreciation.

        2.how to pass the entry of Insurance.

        3.Trading A/c And Profit & Loss A/c And Balance sheet

        4.How to reconcile the supplier and customer and Bank.

        I will grateful to answer this question send through my above e-mail ID

        • Biplab nandy

          Thanks for the answer i hereby request you please give the answer below question.

          1.How to pass the entry of depreciation.

          2.how to pass the entry of Insurance.

          3.Trading A/c And Profit & Loss A/c And Balance sheet

          4.How to reconcile the supplier and customer and Bank.

          I will grateful to answer this question send through my above e-mail ID

      • abdulla

        Sir i know how to pass the journal entry…
        but prepaid expenses should come under wat head?

        • Ravi Shankart

          prepaid exp.is the group of (P&l A/c) indirect exp.head

  • MEGHNATH

    Dear Sir,
    Please advise us journal entry for shop rent paid in advance on 1st June 2010 (4 quertly post dated cheque paid)

    • http://www.tallynine.com Mahendra

      Meghnath,
      Surely, I can help you but only if you post your query with your Tally serial number

  • http://gmail.com sonali

    i have no idea to pass the entry & how to pass the entry in tally 9.0

  • Goutam

    What is normal journal entry for pre paid expenses?

  • Anil

    Hi Sir,

    Thanks for your valuable explanation. We might required you for further information relating to basic accounts.

    Thanks & Regards,
    Anil

  • Chethana

    Sir i want to know what type of voucher is prepaid expenses/prepaid incomes/ outstanding expenses/ outstanding incomes in tally

  • rakesh

    An example of expensing prepaid expenses would be if a company had a one-year insurance policy cost of $1200. As each month elapses, $100 of prepaid insurance would be expensed to the income statement until the account is empty at the end of the year.

  • swaathi

    what is the journal entry when insurance premium paid for purchase of new vehicle

  • pavan

    thank you sir

    pre paid expencess entry

  • Raheem

    Dear sir,

    How we consider the Post dated cheq Payment for the Prepaid Rent .
    Example: My financial year is end of December and PDC Date is 31/March/2011
    do we consider the payment Or We consider the Expense for the Periode?

  • hema kumar

    outstanding expenses 31/12/2011 expenses A/c Dr
    O/S expenses A/c
    next financial year we will pay to the expenses than how to write the entry

    • http://www.tallynine.com Mahendra

      Hema,
      That’s very simple.next year Dr.O/s Expense A/c and credit suppliers

  • sudheesh o v

    sir,i wish to join an accountant post in cardamam estate ,they using tally 7.2 can u help me

  • kamal debnath

    how to make entry in tally if i pay rent of march in april next finc year,

    how to pass entry in tally.

  • prateek sharma

    under which group prepaid a/c is created ???

  • M.Periyasamy

    How to reconcile the supplier and customer and Bank

  • madani kk

    dear sir
    regarding the above explined prepaid exp. inthe case of insurance which one we transferd to prpaid exp how will post next year

  • Alkesh Patel

    Thanks a lot sir
    for giving these ready to use manual for Accounting tips which are very useful for all of my friend who are in this same filed.

    Again Thanks a lot

    Alkesh Patel

  • Sagar R Sah

    Sir,
    Thanks for the articles. Its really very helpful in order to clear the concepts and rectify the errors. I want to know about the entry in the case where there is LOSS DUE TO THEFT/FIRE, in Tally. What & How the entry should be made.

  • rajani

    sir,
    I have an inventory itom nemely A & it has two Quality namely 1 & 2 then how can I maintain stock

  • divya

    sir, the entry for payment of outstanding expenses is
    Outstanding expenses———————-Dr
    Cash a/c—————————————Cr
    In tally 9.0, I am not able to enter it in the payment voucher. What might be the reason please reply

  • Chetan Kalyan

    If i paid prepaid tax how will i pass jv for prepaid tax every month?

  • Nishant Kumar Jha

    sir what entry should be pass for five hundred advance given to ram and he spend two hundred for office expense and he return three hundred.

  • shabana

    I am working in accounts field since 15 years but not able to use proper terms of accounts, many times cannot differentiate between credit bal and debit bal and…..
    not yet learnt to finalise the books of accounts, please guide me

  • aymana hajis

    hi i want to know how to enter inventory in tally

  • mahender kumar

    mr nishant

    i tel u some thing if i am wrong u can tel me ……supose u give to 500 for exp.he 200 exp for office…….u pas the payment entry misc exp is debit and cash bokk is crdit…….and 300 u count u cash book when u will do the closing

  • mahender kumar

    prateek

    prepaid a/c u can do the current assets group a/c

  • amit kumar

    what is difference discount and cash discount

  • Sneha

    how to check the brs in tally

  • Sekhar

    I have to book 2 months of rental income for the previous year ( Feb/mar’13) so how do I provide this ?Pl advise

  • Amit

    Dear Sir ,
    Please can u tell me if their insurance period is come for middle date expiry .. how i calculate it for prepaid expenses ?

    e.g.policy period 29.04.13 to 28.04.14 . for Rs. 86112 insurance amt. paid

    our fy year is Jan-13 to Dec-13 please suggest me with tally entries.

    Thanks
    amit

  • Amit

    Dear Sir,

    Can u explain abt medical insurance policy entries ? how to deal with medical insurance and what entries will be pass for that if we claim for insurance in tally 9

    Thanking you

    amit

  • sabeena

    sir withdrawn a cash from bank how it will reflect in contra entry

  • manivel .m

    may I know the journal entry for cash paid in advance for the purchase of goods
    Thank you

  • M.ARVINDAKSHAN

    please give me full details of journal entry for finalization of accounts with examples

  • Glenn Macwan

    Hello Dear Sir,

    first of all i thanking you to develop this super sites for everyone & so sir please suggest me that i have in query, i want to know about whom to call Financial Year & Assessment Year? so i want to know about that…. i also want to know about journal entries like vat tax entry & how to pass?? so please explain me in details….

  • sakil ahmed

    Sir

    I created a pay head for income tax with a specified formula and also prescribed slab. But when i put for auto fill option for salary entry of employee it did not calculate tax as per slab. Straight away it calculates tax on highest slab. Is there any setting that i have missed . Please suggest me

    Regards

  • Rakesh

    hello Sir
    i m working as accountant in emx world
    i want to know if i m give some money example 10000 for office stationer through bank account and staff spend 8000 thousand for stationer and 2000 thousand return in cash then how to pass a entry
    my tally serial no. is 755280585 Registerd Name emx events and entertainment pvt. ltd

  • sanjay chavan

    wich type of entry comes in journal. please tel me Sir

  • Naresh.Chavada

    Very thankful to given information

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